TaxTMI 
TaxTMI 
2021 (1) TMI 922
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....ions wherein the quantum of disallowance u/s14A of the Act was not the subject matter? (i) State Bank of Patiala [2018]99 taxmann.com 286 (ii) M/s.Redington (India) Ltd [2017]77 taxmann.com 257 2. Whether on the facts and in circumstances of the case, the Tribunal was right in restricting the disallowance u/s14A of the Act to the extent of exempt income earned during the relevant previous year, when section 14A of the Act does not permit any such restriction? 3. Whether on the facts and in circumstances of the case, the Tribunal was correct and justified in deleting the addition made to the books profits computed u/s115JB being expenditure incurred to earn exempt income even though clause (f) Explanation 1 to section 115JB of the Income Tax Act specifically provides for it?" 3. We have heard Mr.Karthik Ranganathan, learned Senior Standing Counsel appearing for the appellant/Revenue and Mr.R.Sivaraman, learned counsel on behalf of the respondent/assessee. 4. The substantial questions of law raised for consideration were answered against the Revenue in the case of Marg Ltd. vs Commissioner of Income Tax ([2020] 120 taxmann.com 84 (Madras)). T....
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....sions as well as the provisions of law, the assessing authority has disallowed the said sum and unfortunately the Appellate Authorities have also casually upheld the said findings. 7. On the other hand, Sri Y.V.Raviraj learned counsel for the Revenue urged before the Court that though the disallowance in excess of the dividend income earned by the assessee to the extent of Rs. 1,80,30,965/- may not be justified, but the assessee himself has computed the said figure of Rs. 2,48,85,000/-; in terms of rule 8D of the Rules and had supplied the same to the assessing authority and therefore the assessing authority was justified in disallowing the same. 8. We are not impressed with the said contention raised by the learned counsel for Revenue. The said disallowance, under section 14A of the Act r/w Rule 8D of the Rules, of the expenditure incurred to earn an exempted income has to be computed in accordance with rule 8D of the Rules, which in essence stipulates that the expenditure directly relatable to the earning of such exempted income, can only be disallowed under section 14A of the Act. 9. The assessee in the present case had claimed that he had not incurred....
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....ly in relation to a case where an assessee claims that no expenditure has been incurred by him in relation to income which does not form part of the total income under this Act: Provided that nothing contained in this section shall empower the Assessing Officer either to reassess under section 147 or pass an order enhancing the assessment or reducing a refund already made or otherwise increasing the liability of the assessee under section 154, for any assessment year beginning on or before the 1st day of April, 2001". Rule 8D: Method for determining amount of expenditure in relation to income not includible in total income. 8D. (1) Where the Assessing Officer, having regard to the accounts of the assessee of a previous year, is not satisfied with - (a) the correctness of the claim of expenditure made by the assessee; or (b) the claim made by the assessee that no expenditure has been incurred, in relation to income which does not form part of the total income under the Act for such previous year, he shall determine the amount of expenditure in relation to such income in accordance with the provisions of sub-rule( 2). (2) The expenditure i....
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.... 61. Omitted by the IT (Fourteenth Amdt.) Rules, 2016, w.e.f. 2-6-2016. Prior to its omission, sub-rule (3) read as under: '(3) For the purpose of this rule, the "total assets" shall mean, total assets as appearing in the balance sheet excluding the increase on account of revaluation of assets but including the decrease on account of revaluation of assets.' 13. The manner in which the aforesaid disallowance has been made by the assessing authority and has been upheld by the appellate authorities leaves much to the desired and the same cannot be sustained and therefore the matter deserves to be remanded back to the Assessing Authority. 14. We make it clear that the expenditure for earning exempted income has to have a reasonable proportion to the income, so earned, going by the common financial prudence. Therefore, even if the Assessing Authority has to make an estimate of such an expenditure incurred to earn exempted income, it has to have a rational nexus with the amount of income earned itself. Disallowance under section 14A of Rs. 2,48,85,000/- as expenses to earn exempted Dividend income of Rs. 1,80,30,965/- is per se absurd and hypothetical.....
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....he ITAT, though we are not subscribing to the theory of dominant intention applied by the High Court. It is to be kept in mind that in those cases where shares are held as 'stock-in-trade', it becomes a business activity of the assessee to deal in those shares as a business proposition. Whether dividend is earned or not becomes immaterial. In fact, it would be a quirk of fate that when the investee company declared dividend, those shares are held by the assessee, though the assessee has to ultimately trade those shares by selling them to earn profits. The situation here is, therefore, different from the case like Maxopp Investment Ltd. where the assessee would continue to hold those shares as it wants to retain control over the investee company. In that case, whenever dividend is declared by the investee company that would necessarily be earned by the assessee and the assessee alone. Therefore, even at the time of investing into those shares, the assessee knows that it may generate dividend income as well and as and when such dividend income is generated that would be earned by the assessee. In contrast, where the shares are held as stock-in- trade, this may not be necessar....
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.... the revenue drew our attention to the marginal notes of s.14 A pointing out that the provision would apply not only where exempted income is 'included' in the total income, but also where exempt income is 'includable' in total income. 8. He relied upon a Circular issued by the Central Board of Direct taxes in Circular No. 5 of 2014 dated 11-2-2014 to the effect that s.14A was intended to cover even those situations whether there is a possibility of exempt income being earned in future. The Circular, at paragraph 4, states that it is not necessary for exempt income to have been included in the income of a particular year for the disallowance to be triggered. According to the Learned Standing Counsel, the provisions of s.14A are made applicable, in terms of sub section (1) thereof to income 'under the act' and not 'of the year' and a disallowance under s.14A r.w. Rule 8D can thus be effected even in a situation where a tax payer has not earned any taxable income in a particular year. 9. We are unable to subscribe to the aforesaid view. The provisions of section 14A were inserted as a response to the judgments of the Supreme ....
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....on by the Assessing Authority that the expenditure incurred to earn exempted income, as computed by the Assessee is not acceptable for the specified reasons, the Assessing Authority cannot even resort to computation of such disallowance under rule 8D of the Rules. Despite this being the position of law crystal clear and there being no other contrary view from any other High Court, one fails to understand how the Tribunal in the impugned order could still take a view contrary to this legal position and uphold the disallowance under Rule 8D read with section 14A of the Act, much beyond the quantum of exempted income of dividend earned by the Assessee in this year. The misconception of the Assessing Authority as well as Tribunal appear to have arisen because they have read Rule 8D providing for computation method of disallowance in isolation, as if it were an island provision or stand alone charging provision and they assumed that the disallowance as computed under Rule 8D is to be taxed as a notional income of the Assessee. This is absolutely impermissible in law. The reach of computation provision, namely Rule 8D cannot be read beyond the parent provision of Section 14A itself, whic....
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.... and even if the interest paid on such borrowed funds is more than the actual dividend earned during the year in question, the disallowance of interest cannot go beyond the amount of dividend itself. As such, interest paid on borrowed funds by the Assessee does not constitute 'income of Assessee for that year'. Section 14A has been introduced not to allow expenditure incurred to earn such exempted income in the form of dividend as an allowable expenditure against the exempted income of the Assessee and therefore, obviously the disallowance too cannot exceed the extent of dividend itself. The Tribunal itself in many such cases has upheld the disallowance under section 14A only to the extent of 2% of the Dividend income or other exempted income even if Assessee claimed that no expenditure was incurred to earn such Dividend income and even appeals filed by the Assessee against such 2% disallowance have been dismissed by this Court. Therefore, such an inconsistent approach on the part of the Tribunal cannot be sustained. 16. The contention raised on behalf of the Revenue by Mr. Karthik Ranganathan that even if the dividend income is not earned in the present y....
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....ies and perused the material on record. The assessee made total investment in the assessment year 2009-10 as follows: Subsidiaries UTI Infrastructure Rs. 2,38,89,48,500/- Advantage Fund series Rs. 10,00,000/- Investment in sister concerns Rs. 1,59,39,000/- 6.1 For the assessment year 2010-11, the total investment is as follows: Subsidiaries UTI Infrastructure Rs. 4,35,42,53,360/- Advantage Fund Series Rs. 10,00,000/- Investment in sister concerns Rs. 1,59,39,000/- 6.2 For the assessment year 2011-12, the total investment is as follows: Subsidiaries UTI Infrastructure Rs. 5,17,41,16,895/- Advantage Fund series Rs. 8,53,000/- Investment in sister concerns Rs. 1,59,39,000/- 6.3 In this case, the assessee made average investment which yields no income or exempted income is as follows: 2009-10 Rs. 1,96,32,20,750/- 2010-11 Rs. 3,39,69,83,166/- 2011-12 Rs. 4,78,02,04,127/- The AO disallowed 0.5% of the average investment as follows: 2009-10 Rs. 98,16,104/- 2010-11 Rs. 1,69,84,915/- 2011-12 Rs. 2,39,01,020/- The assessee divident income received and claimed....